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Catherine Craig: In the first of two podcasts on India, Investment director Natalya Zeman speaks to India specialist Anirudha Dutta and equity analyst Himanshu Sharma. Recently returned from a research trip to the country the trio provide notes from the fields and discuss how Capital Group's boots on the ground approach informs our investment decision making.

Natalya Zeman: Anirudha, Himanshu, thank you both so much for joining me today. The last time the three of us were all together was in Delhi, and we had just completed a week of meetings, meeting with companies, doing a factory visit. We met with government ministers, with members of think tanks and with other investors. This is the sort of research that is the backbone of how we invest at capital. And indeed, back in 1986, we were invited by the world Bank to launch the world's first ever emerging market strategy because of our research capabilities. Today, we have offices across a number of emerging markets, including offices in India and China, for that matter, as a base to conduct our research across these emerging markets. Now, Aniruddha, we have you in the room today and you are based in Mumbai. You also have oversight responsibilities for our China industry specialists. Can I ask you, what are the benefits of having a research presence on the ground in India and indeed in China? And can you tell me a bit about what a week looks like for you?

Anirudha Dutta: Thank you Natalya. Capital Group is unique in having this office in Mumbai among large foreign institutional investors, and I think the same goes for China as well. It's a unique advantage that we have that we can bring it on the ground colour and about consumer trends, about policies, about politics, about developments in different sectors. It's a very differentiated insight into a country that we are able to get to. Our portfolio managers and analysts were based all over the world. It's a mosaic that we are able to. You know, put together and connect the dots, which I think hopefully gives us a unique advantage in our investment decisions, an early peek into what's happening in these countries.

Natalya Zeman: Great. Thank you very much. We also have Himanshu in the room, who is an investment analyst focused on Indian companies broadly. I thought your knowledge was extraordinary across so many different sectors, in the very different sorts of company meetings that we did when we were out in India. Can you tell us a bit about how often you travel to India and how valuable these trips are for making your investment decisions?

Himanshu Sharma: Yeah, so I travel to India about 4 to 6 times every year. Sometimes this year it's been a bit more, for context, I think in the last 12 months have been outside the UK for about 140 days, many of them in India, some of them, travelling with our colleagues, in the US. I think, you know, travelling to India and travelling with colleagues is super important because India is at a stage of development, which, you know, the Western world saw about 30, 40 years back. To be able to learn from investors who have invested in those trends, a couple of a few decades back is super important. It helps us have an edge as a global organisation who's seen some of the trend, play out in the other markets. And I think as an investor who's visiting India multiple times, what happens is that you can then combine that global knowledge and see where it's applicable, because it's not always going to be applicable in all scenarios and where India is actually doing better or worse, and what investment opportunities arise from that. I think it's been super interesting. It's also a very it's also a very interesting time to be going to India, because Covid, you know, it was a positive and a negative in a way.  One of the positives, that I see from Covid is that, you know, if you visit a country after two years, you're actually able to appreciate more the differences in physical and digital infrastructure. And to me, that really stood out, you know, in, in, one of my trips, which I made after Covid and each trip subsequently has been, extremely interesting every time I notice something different, in the trip that all of us did together. One of the things that stood out to me was when we did the planned visit, you know, seeing the number of women on the plant floor was a very, very positive surprise. And, you know, the way I've always thought about is that, you know, GDP growth in any country is a product of population growth and productivity. And we've really had like about half our population not being able to contribute in, what is measured as economic activity. And as they become more productive and get involved and get paid for the work that they do, I think that power can be much more, much more than what math would suggest. It could be at a time when we might see non-linear growth from here just because the work force, participation from women is going to increase a lot.

Natalya Zeman: Fantastic. Thank you. Thank you very much. Perhaps to follow up with that question, is there ever, an investment trip that you have done that has really changed your view on an investment thesis that you have at a given time?

Anirudha Dutta: Yeah, no, I think in, spaces, especially in small cap companies, you know, management transition seems to be super important. And, you know, there have been trips when I've been to India, been invested in the company, and I'm very focused on how, you know, that leadership transition is going to be when a CEO or a leader of the company is going to be retiring. And, you know, if I have not liked what I've seen, I have, you know, me in my mind, you know, it's been a good investment for us but may not be good going forward. Similarly, there have been, you know, instances where, you know, having grown up in India, you have a bias against a company. But then when you visit India, use, you know, without going into the name of the companies, if we look at the public sector companies in the past, a lot of times, you know, the rule that a lot of foreign investors followed was that, you know, just you will do really well in India without investing in public sector companies. But I think having visited India like multiple times over the last 2 or 3 years, you see a change in the direction of how those companies are run. It increases your confidence. You combine that with valuations. And, you know, you have a pretty strong investment thesis. And, I would say we are one of the few, you know, foreign institutions which was able to make a pivot as a whole to invest in some of the public sector companies because of what we saw, as a change in those companies.

Natalya Zeman: Interesting. And as you say, you don't necessarily notice that change very quickly unless you are actually frequently visiting the companies and visiting the country. And one thing I observed on our trip was that we had another colleague of ours, a portfolio manager who's been at capital a long time and who has been travelling to and investing in India since the early 1990s. So, discussing with him also the changeover that long time frame was very useful historical context. And in returning to you, you are, Indian economic expert. You've also written a book, actually about female participation in the workforce to pick up on one topic that Himanshu highlighted. What sort of research trips do you tend to do as our economic expert, as opposed to company specific investment analyst? And how do you work and collaborate with the investment analysts and with the portfolio managers to support the investment decision making process?

Anirudha Dutta: Let me just the first part of your question, Natalya. First, what kind of trips that I do, and there is no really set pattern to it. I do a wide variety of trips. So let me just give you an illustration of it. You just mentioned the trip that earlier we did with when you, Himanshu, and one of our portfolio managers were there with us. You meet a wide cross-section of companies, you meet certain government regulators, you meet some journalists, and you generally get a broad overview of what's happening in the country and the companies. So that's one kind of trip, right?

The other one is where we pick up a special team and then do a trip with a very select group of portfolio managers in handlers. To give an example again, earlier this year, twice or thrice I've travelled with portfolio managers and analysts clearly looking at what's happening with the India's manufacturing sector very specifically. Then a lot of news and noise around China, plus one diversification of supply sources. And India's never been looked at as a manufacturing destination really. If you look at probably over the previous decade or almost two decades, Indian manufacturing industry was never really the place where investors focussed on. But this year, very early on from late last year, we started travelling to these places. I remember one specific instance where we were in an industrial city, which is developed by the private sector called Street City in the southern state of Andhra Pradesh. And there were people with me or analysts and PMS who have been doing these kinds of trips in China for 30 years or 20 years, and they stood out there and said, oh, for the first time, it seems that India is getting this right now. That's a very, very useful insight. Arranging these kinds of groups, because when you went to an industrial city like this, the industrial city is not a listed entity, right? They don't have any connection with the stock markets or investors like us. Many of the companies out there are multinationals again, who are not really, you know, they have no need to meet investors like us out there. To arrange trips like this is a second part of what I do, and we have done this with energy transition. For example, we have done this with organised retailing, for example, over the years, so we keep doing this.

A third kind of trip that I do, which is on my own mostly, sometimes some analysts join me, is to travel into the hinterlands, into places where our analysts and, portfolio managers typically probably will not get the time to travel because they're there for a week, four days, maybe two weeks at best, right? I travel into these poorer states, smaller states, smaller towns, and cities and try to bring the stories of people, of real people and their lives. I try to meet out their unlisted companies, for example, and say, hey, what's happening in these cities?

Two things that I'm very, you know, positive on going forward, is one that Indian manufacturing sector is reviving in a way that we haven't seen. As I mentioned, over a decade or two decades, and for a wide variety of reasons, and which you can go into later, time permitting. Second is the small-town growth. For most of us, you know, when we live in Mumbai and Delhi, our focus is on, oh, what's happening in Mumbai, you know, the malls are full, or the infrastructure is coming up and you visit the smaller towns and cities to see is there an infrastructure growth out there? Is this a Mumbai story only? Is there a consumer growth out there? Is there, you know, what kind of cars are getting sold? Are car dealerships at all opening in these cities and towns?

I remember going to a state called Bihar, which is the probably one of the poorest deep-water states in India, going to visit Bihar I spent about a week, nearly a week earlier this year, and I was in Patna. This was a place if I talked about years back when I was doing a trip like this with, some other analysts a couple of analysts dropped out of the trip because they said the family said the law and order is so bad in Patna that you cannot travel out there. I went at about 10 p.m. in the night, I was returning from some town, which is a couple of hours away, and the riverfront was full of hundreds of people and young people, girls and boys having snacks, eating food, and generally having a good time. This could not have been imaginable. Unless you travel there, you do not realise how much India has changed for the better.

Natalya Zeman: Brilliant. That's a really, really helpful overview of the breadth of the research that is possible by having a research presence in Mumbai, having somebody like you, travelling constantly, not just to the big cities and to the listed companies, but also to more broadly to other parts of India to visit unlisted companies, to visit those industrial cities that are emerging across India. Thank you very much for painting that picture.

Anirudha Dutta: So, I want to expand on this and mention 2 or 3 very specific groups that I do, I did, which I think are very unique and again highlights how differentiated our researchers. In early 2019, there were a lot of discussions taking place on what way the general elections will go, and if BJP does not win a full majority, what kind of government we will have, who could be the alternate prime minister? At that point, we did something which is probably the most one of the most fascinating research trips I've ever done in my career as an analyst. I decided to travel with a truck driver for two days and two nights and started in Mumbai and ended up in the state of Rajasthan in the City College, Jaipur after travelling for two nights. I actually didn't sleep for two nights on the truck because the driver was driving, and we were chatting up. It's so happened that one of the drivers was from Uttar Pradesh, which is a large city, a large state, and since the largest number of members of parliament and his helper was from Rajasthan, we had a fascinating discussion. I remember coming back and writing the note and saying, you know what? If these guys are right and people we met on the road where we stop to have our meals, etc., then BJP is coming back to power and there are no problems, and I think that was a lot of portfolio managers, quite a few portfolio managers later on came back and told me that was incredibly useful for them. Something similar happened during Covid as well. You know, the pandemic, harsh lockdown, the media headlines all around all of the world about India was very negative, you know, and migrant workers walk back home, the people who lost their lives, etc. The moment travel was allowed I started travelling around to smaller industrial towns and cities, first in Maharashtra, the state where I live in, and then across the country. I came back and said, look, this thing is picking up faster than what you would expect. Don't ask me. I mean, I didn't have all the answers to why it was happening when people had been so badly impacted. Partly government policies were helping, partly the resilience of people was helping but the fact is, whether it was employment, whether it was demand, everything was coming back very, very rapidly and normalising far faster than what people were expecting, and I think we saw that in the results in the markets.

Natalya Zeman: That's great. It's something I observed on a trip was how in between meetings all of us would talk to taxi drivers, would talk to the receptionists in buildings, were taught to a whole host of people, not just the company management teams that we were meeting with in order to gather sort of information on, you know, which telecom provider they were using or who they were planning to vote for in the forthcoming election, etc.. So that paints a very beautiful picture of how that is embedded within the research that we do.

Himanshu, turning to you for final question of this part of our podcast. Another characteristic of capital groups investment process is that we, we invest very long-term. Can you talk a little bit about the time frame over which you are considering an investment? The sorts of questions that you therefore ask management teams, and our companies have a surprised by your approach?

Himanshu Sharma: Yes. I think first of all, you know, before I go into that, specific answer, I want to I want to lay a framework on why I think the way I do. So, you know, the first week when I started at Capital Group, you know, we had this orientation in LA. I think one very important part of that orientation is that, they took us to the call centre to actually listen to people who are calling in to listen to, you know, what they're saying, and, you know, as the call comes in, you'll see on the screen what is the amount the person has invested with Capital Group and you know, what is, the time frame that they've invested for?

I participated in 4 or 5 calls, you know, I was obviously listening, the professional was doing the job, I was just listening to them but I could see on the screen that the 4 or 5 calls that came through, people who had, like, an investment of around $30,000 to $50,000 with us for a very long period of time compounding and mostly for the either their own retirement or for their, you know, kids’ education or for, you know, having a house. They were all very long-term investors who trust their money with Capital Group’s funds, or the American fund, so that, you know, they can have, you know, these good financial outcomes over a very long period of time. I think understanding who we are investing on, for is super important. Even if we look at our institutional business, a lot of it comes from clients who have a very long-term horizon, so that plus capital, being a private company, you know, all these things put together allows us to have a very long-term horizon.

Then the second part is our own, you know, reward system within capital is orientated towards, generating long term superior results for our shareholders. And you know, when you put those two things together and the culture at the organisation, all our calls, even if an analyst wants to speak about short term, many times BMS will reorient that question toward what it means, for the long term, investment, results. You know, the culture on long term results in capital is so pervasive that, you know, you within a year, having spent a year or two at Capital Group like that's how everyone starts thinking now, how that helps us is that, you know, when we're investing in India, for example, the questions that you're asking the management are actually the ones that they want to answer, because these are entrepreneurs. Many of these are entrepreneurs who hold a substantial portion on the of their companies. Their interests are aligned with us, and they're thinking in terms of like your next two decades, not necessarily in terms of next two quarters. What it means is sometimes when we invest in India, the people who we are competing against might get things right for the first two, three quarters, that's fine. I think they do miss out on the long-term opportunities that we've been able to invest. As an example, you know, in some of the leading private sector banks in India, we've been the largest investor since the IPO, shareholding, as did more or less. Constant. I wouldn't say 100% constant, but more or less constant. And it has meant that our shareholders, have enjoyed the benefits of our long-term approach. When we are doing IPOs, for example, we're able to share data with the companies and tell them that, look, you know, everyone says that they're long-term investors, but if you actually see how long we hold stocks, the difference is night and day. It gives us a very good standing, with the companies they want to partner, with us and, I think, I think it's, it's it is very special. It is, it and the way we've been able to manage that is by right from recruiting to onboarding to, you know, the calls to every senior person in the organisation, you know, focusing a lot on the language that we use, at capital while talking about companies. It all creates a culture of long-term investing. It pervades through the organisation. A lot of companies have seen that in action, so it helps develop a reputation. Many times, even if a company is thinking of doing an IPO three years from now, if they're in London, if they're in L.A., if they're in San Francisco, they request to meet us. We get an audience with them early in the process. We get to understand the companies much earlier than many of our competitors, and that is a real competitive advantage.

Natalya Zeman: Thank you both very much for joining me for this podcast today, which really brought to life the sorts of research trips we do, how these research trips inform the investment decision making process. We looked at some of the characteristics of our research process at capital, including the long-term nature of the research we do, the breadth of the research we do, the collaborative nature of our research.

In our next episode, part two of this podcast, we will be focusing on some of the opportunities and risks that we were focussed on during our most recent trip to India, so please tune in to that. Thank you both very much.

Closing disclosure

We're always trying to get better, so if you have any feedback, including topics you'd like to see addressed in future episodes, send us an email at CapitalIdeasPodcastAustralia@capgroup.com. And if you like what you heard today, please follow us on your favourite podcast platform.

For Capital Ideas, this is Matt Reynolds reminding you that the most valuable asset is a long-term perspective.

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